3. Paula is considering going to law school. If she does, she will spend S60,000

Question

3. Paula is considering going to law school. If she does, she will spend S60,000 on tuition and books to get a college education (during the first time period), S120,000 on tuition and books to get a law degree (during the second time period), and her law degree will earn her $500,000 during the remainder of her work-life (during the third time period). Paula's time preference for money (her discount rate) is 20 percent. a. What is Paula's present value of obtaining a law degree? b. Suppose that Paula is also considering an alternative career path, in which she obtains a college education in the first period (with the same costs as before) and enters the work force immediately as a marketing analyst. She earns S100,000 in the second period and $200,000 in the third period under this option. Will she choose to become a lawyer or a marketing analyst!? Show your work. c. If Paula's discount rate is 10 percent, will this change her decision? Show your work.

Explanation / Answer

ANSWER:

A) PV OF OBTAINING LAW DEGREE = -60,000(P/F,20%,1) - 120,000(P/F,20%,2) + 500,000(P/F,20%,3) = $156,018.52

B) PV OF BECOMING MARKETING ANALYST = -60,000(P/F,20%,1) + 100,000(P/F,20%,2) + 200,000(P/F,20%,3) = $135,185.19

SINCE THE PV OF OBTAINING LAW DEGREE IS MORE THEN THE PV OF BECOMING A MARKETING ANALYST , THEREFORE SHE SHOULD CHOOSE TO OBTAIN A LAW DEGREE.

C) PV OF OBTAINING LAW DEGREE AT 10% = -60,000(P/F,10%,1) - 120,000(P/F,10%,2) + 500,000(P/F,10%,3) = $221,938.39

PV OF BECOMING MARKETING ANALYST AT 10% = -60,000(P/F,10%,1) + 100,000(P/F,10%,2) + 200,000(P/F,10%,3) = $178,362.13

AT 10% DISCOUNT RATE , SHE WOULD CHOOSE TO OBTAIN A LAW DEGREE AS AT 10% THE PV OF OBTAINING A LAW DEGREE IS MORE THEN BECOMING A MARKETING ANALYST.

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